Virtual Stock Market and Gambling Laws in India

A few days back I received a very interesting business plan – Create a gaming zone where game numbers will move based on F&O prices, a virtual stock market of sorts – where everything at the front end of the gaming studio will be integrated to real time stock prices.

Without getting into much detail on how the games worked – it was proposed to be a brick and mortar gaming studio (not online) with actual footfalls and a robust system of conducting KYC compliance.

Is Virtual Stock Market Illegal in India?

Absolutely Yes.

Since casinos are illegal in India, could there be a business model around gamifying derivative trading?

We received 3 legal opinions on the matter, all of which suggest the same. Interestingly though, the legal explanation as to why you can’t have a game like the one envisaged above differs in each opinion.

To my mind the most plausible reason in support of such an activity being illegal is that – it’s akin to running a parallel and virtual stock market which is not allowed.

Dabba Trading – the Virtual Stock Market

While many of you may be familiar with dabba trading, for those who are not – essentially it is the practice of executing trades off the market. The operator who provides such a service typically maintains an office just like that of any other stock broker/ sub broker. So much so that often the clients do not even realize that their trades are not even getting executed on an exchange. The operator maintains these orders only in his local system and aims to make money at a future date when the clients make a loss.

How does dabba trading help and harm the participants:

The Operator typically believes that eventually most people, especially traders, lose money in the stocks markets. That at a future point his client(s) will suffer a big F&O loss. Until then he is happy to keep paying them their share of profits.

Keep in mind: In past, many dabba operators disappeared overnight when things went against them and when they could not pay their clients.

The Clients are either unaware that they are dealing with a dabba operator, or are happy to deal with him since they do not pay taxes like the Securities Transaction Tax (STT) and more importantly the Income tax. This allows them to execute trades using their unaccounted money, unlike on the actual market where funds have to be channelized through banking channels.

In many cases, dabba operators charge higher brokerage for allowing clients to deal with unaccounted money and for helping them avoid taxes. There have been instances in past where dabba operators have sent fake trade contract notes to keep his clients unaware.

The government and enforcement authorities suffer the most since not only do they lose revenue (i.e. tax collection), but must also deal with almost inevitable complaints at some stage in future.

So any model that tries to replicate a stock market AND uses a form of money or other incentive to encourage people to participate in such a model is dabba trading.

Model Portfolios

Finance websites can have model portfolios only to help you view your holdings but they cannot allow you to trade or play a game for incentive.

A final word – on the Purpose of F&O Market

One of the opinions stated that such an activity can not be allowed because the purpose for which the F&O market was created was to allow large funds to keep their positions hedged and not for the retail participants to speculate.

This argument should actually support such an activity. I say this because of 2 reasons:

Firstly, it has never been the intention of any regulator or the government to discourage, let alone prohibit retail participation in the F&O market. On the contrary, the derivative trading module exam conducted by the National Institute of Securities Markets (NISM) suggests that-

An important incidental benefit that flows from derivatives trading is that it acts as a catalyst for new entrepreneurial activity. The derivatives have a history of attracting many bright, creative, well-educated people with an entrepreneurial attitude. They often energize others to create new businesses, new products and new employment opportunities, the benefit of which are immense.

In any event, it was not difficult to restrict the F&O market only to large fund houses, if such a need were ever felt.

The Important Question

If retail participation in the F&O market is allowed, then why not allow a game to be modelled around this? If F&O is not gambling, such a game necessarily cannot be gambling. I don’t think it is hard to conduct a KYC for the players and collect all legitimate taxes while they play such a game.

A Word on Gambling Laws in India: the Rule Regarding Game of Skill vs. Chance

In India, whether an activity is considered gambling (or not) is determined by the element of skill vs. the element of random chance, which determines the outcome of the activity. If something is a matter of pure chance (like coin flipping), it will be considered gambling and hence illegal. On the other hand, if there is an element of skill needed to succeed, it may well be considered legal. It is a pointless discussion given that F&O trading is very legit (and so approved).

Nevertheless, just for amusement, consider this – Rummy was proved a game of skill while poker was considered a game of chance; and my favorite – some enterprising lawyers in past convinced the concerned authorities that horse racing is a game skill. Not sure if that is horse’s skill or human skill, but we are allowed to do that in India!

Last updated: 4th February, 2016

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Rajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.

Gambling involves risking something of value on an uncertain event in hopes of winning something of greater value.
In almost every Indian state casino, cricket betting, gambling is illegal. But lottery, lotto tickets, lucky draws etc are permitted.